EU: Credit Rating Agencies

Lord Bilimoria Excerpts

Monday 3rd October 2011 Lords Chamber

[Lord Sassoon]

My Lords, there are quite a number of points wrapped up in that question. The first point to recognise is that the credit rating agencies plainly got it wrong when it came to the structured products which were at the heart of the financial crisis. On the other hand, their record in other respects during the financial crisis, and particularly the sovereign debt crisis, has been reasonably good, and all the evidence shows that. Having said that, I completely agree with the noble Lord that competition is very much what the Government would like to see, but the way to introduce competition is absolutely not to have any publicly funded or publicly sponsored credit rating agency. Indeed, Mr Barroso himself recognised this recently by opposing any suggestion of a European publicly funded agency. I agree with the noble Lord that we want to see competition, but not through setting up a government sponsored agency.

[Lord Bilimoria]

My Lords, to follow on from the noble Lord, Lord Foulkes, surely the Minister agrees that these credit rating agencies were instrumental in causing the credit crunch and financial crisis by rating what ended up being worse than junk bond instruments as triple-A? They were allowed to get away with being funded by the people they were reporting on. Is there moral hazard with the banks? This is moral hypocrisy. Is enough being done to address it?

[Lord Sassoon]

My Lords, I have already said that the credit rating agencies got it completely wrong when it came to the rating of structured products. As a result of that, there have already been two regulations, so-called CRA1 and CRA2, out of Europe since the crisis and a third set of proposals is expected in November this year. The first two sets of proposals address the matters which the noble Lord raises. There is now a system of registration. There are new regulations around conflicts and how to handle them, as well as around transparency and disclosure. I agree that the issues he raises are serious, but they are very much the ones which the European regulations have addressed.